Service providers are struggling to break free of the flat rate, unlimited usage tariffs for data services. As smartphones and connected devices proliferate, service providers are missing the chance to up-sell and capitalise on increasing subscriber connectivity and usage. So what’s the answer? Dave Labuda, CEO of Matrixx Software, shares his views.
After months of speculation, AT&T and Vodafone acknowledged late last year that the unlimited, flat rate data tariff is no longer profitable for them. While this doesn’t mean the end of flat rate tariffs, because service usage caps can still be placed on subscriber accounts, it does mark the end of flat-world thinking when it comes to processing data transactions.
The need to develop new business models that can cope with the explosion in mobile data traffic has accelerated as operators have struggled to find a corresponding increase in revenue. The average smartphone can create up to thirty times more data transactions than traditional handsets, and some operators have noted a doubling effect, roughly every eight months, in the traffic volume they are handling. However, for each doubling there’s only a revenue increase of about two percent. Whether you believe that operators underestimated the smartphone effect, or conversely, you think their marketing departments have been wildly successful, the only way forward is a reinvention of how data services are packaged, priced and charged for.
As operators evolve to tiered pricing, usage-based pricing and other new business models, the underlying systems that support pricing, charging and billing must also evolve. In order to enforce usage caps, overage charges, advice of charge and bill shock prevention features, charging must move from an after-the-fact, batch-based operation to a real-time, interactive function that touches the subscriber. Real-time charging provides the interactive link between the subscriber, pricing information, the network and service delivery that enables operators to break free from flat rate tariffs and get creative with new pricing models and charging paradigms.
While moving to real-time seems like a no-brainer from a business and marketing perspective, operators have been challenged to justify the move. The primary obstacle is that the operational costs of maintaining and scaling real-time systems are seven to ten times the cost of existing batch rating systems, making the move to real-time prohibitive for many operators, especially as data usage volumes continue to surge.
So, how is this dilemma solved cost-effectively, what needs to change, and what will the data plans of the future look like as a consequence? Whatever the solution, it’s clear that the move to real-time must be made with reduced equipment acquisition and operational cost that will result in the reduction of the cost it takes to process each billable transaction.
In conversations with operators, about 75 per cent of them have suggested that scaling IT systems to meet the demands of mobile broadband is one of their biggest worries. Current real-time solutions lack the performance and scalability required to handle an explosion in transactions from the increasing number of smartphones and connected devices. To be successful, a major leap in the underlying economic model is required, and that involves a dramatic increase in IT processing power.
From an architectural perspective, this literally involves reinventing real-time. Current systems incur a huge transaction processing overhead, which effectively means that systems perform more slowly as the traffic load grows. In turn, this inflates the cost of running them, while all the time, operators have been unable to grow incremental revenue from the services they support.
If the cost of processing transactions in real-time could be lowered dramatically then operators’ bottom lines would be boosted. For real-time to be effective, operational costs must be on a par with those of existing batch systems. Then operators would not only retain margins as usage volumes grow, they also gain the benefits of a more flexible services platform that enables a better financial relationship with subscribers without incurring the additional operational costs. Getting from here to there need not be a complex process, either.
Evolving data plans to be more profitable then becomes a three step process. First, real-time authorisation and control must be exerted over data usage. This enables the service provider to charge at a more granular layer and set usage limits to avoid bill shock or billing surprises. It also provides a real-time view for subscribers of what they are spending, which encourages them to make better-informed buying decisions. In fact, when subscribers are provided advice of charge and are able to tap into their accounts in an instant, research shows that they are likely to spend up to 15 per cent more than their previous flat rate.
Second, with real-time controls in place, operators can analyse and quantify the costs associated with processing usage down to the actual cost per transaction (CPT). That way, they can figure out how services need to be priced in order to maintain healthy margins. If CPT can be reduced to one-thousandth of a cent per transaction, for example, then operators are back on track to make their businesses more profitable as the number of transactions increases.
Third, new services can be developed which are predictably profitable, because the underlying CPT is already understood. Service margin becomes more measurable, enabling services to be properly monetised, and for new offers to be made which are based on the value of the service, and not just the underlying cost of the bandwidth to deliver them
The next generation of data plans will be based on real-time subscriber interactivity that encourages informed subscriber buying decisions, offers account transparency and services which are personalised to individual needs. The plans will fall broadly into three categories: balance-based, value-based and policy-based options which can be mixed and matched for different services and bundles.
Balance-based options will be time or data consumption driven such as on-the-fly access for 24 hours or 50MB depending on which happens first. These could include location-based promotions, and rules or priorities that change the way usage is priced depending on the balance or spending level. They also include spend controls and sharing rules which can be configured by the subscriber so that they are alerted if they hit a spending limit, or can set rules that determine what action is taken after spending a certain amount.
Value-based options will appeal to heavy users with sophisticated usage profiles such as corporate customers that are willing to pay a premium for services such as video conferencing and email but expect charges for less critical services such as web browsing to be minimal or bundled in. Or application based charging where the value of the application or service is charged for separately from the underlying bearer network charges.
As real-time charging converges with policy management, policy-based options emerge that include rules that allow quality of service preferences and different classes of service to be provisioned instantly. Subscribers will be offered upgrades or relevant services or promotions in real time, based on what they are doing, how busy the network is, or what their spending habits are. Subscribers will also have the option to switch between basic and premium versions of the same service based on need and situation.
With so many options available, we will all see a huge difference in the value being offered by service providers, who in turn will be able to become more profitable when they can properly monetize their network. Handling the mobile data explosion then moves from being a headache to the opportunity of a generation.